New Report from Vinson & Elkins Outlines the Mixture of Challenges and Opportunities of Low-Carbon Hydrogen for the Energy Transition
According to the latest report from Vinson & Elkins, Unlocking the Opportunity of Low-Carbon Hydrogen: Investment, Incentives, and Collaboration, growing interest in hydrogen to help meet carbon neutrality goals is fueling investments; however, deploying it at scale remains an obstacle. For project operators and sponsors to benefit in the long run, stakeholders across the energy transition ecosystem will need to maintain momentum in infrastructure development, government incentives, and forming project partnerships to mitigate risk, share knowledge, and keep costs manageable.
The report provides valuable insights on hydrogen production, uses, and handling, including its potential utilization across multiple energy sectors — power generation, energy storage, transportation, ammonia and fertilizer production, and other carbon-intensive industries. Accordingly, the analysis looks at ways investors and companies should think about navigating the evolving regulatory framework, which could help propel conceptually interesting projects into actionable opportunities.
Highlights and key considerations include the following:
- The United States currently produces more than 10 million metric tons of hydrogen per year, with the majority of this amount being produced by plants dedicated to the production of hydrogen. Almost all of this production is carbon intensive. However, hydrogen can be produced in “cleaner” or more “low carbon” ways.
- Ammonia could potentially serve as a transportation vector for hydrogen. Not only is ammonia more dense than hydrogen, but it also liquefies at a more feasible temperature. A worldwide network of ammonia storage and terminal infrastructure along with refrigerated ammonia transportation vessels already exists.
- To encourage clean hydrogen development and production, both the U.S. and European Union have implemented programs in an effort to spur significant investment in hydrogen projects. The U.S. has incentivized the production of hydrogen through the use of tax credits and grants through the Inflation Reduction Act (IRA), while the E.U. is implementing rules requiring the use of low-carbon fuels and issuing guidelines as to what qualifies as a low-carbon fuel.
- The U.S. hydrogen industry is still navigating what is “market” in the post-IRA era, especially with the entry of so many players. As a result, some commercial and legal points can vary widely between transactions, and sometimes present traditional issues or new issues entirely.
“Low-carbon hydrogen can play a key role in the energy transition, holding immense promise for eFuels production, industrial applications and mobility applications,” said Alan Alexander, Energy Transactions and Projects partner, Vinson & Elkins. “Despite the challenges that lie ahead in scaling its deployment, governments and companies are increasingly recognizing its significance, and the momentum for low-carbon hydrogen has never been stronger. We are encouraged by the growing inquiries from clients and other key stakeholders who are actively looking at the production and usage of hydrogen.”
“The passage of the Inflation Reduction Act in 2022 marked a monumental investment in climate policy in the U.S., and its inclusion of tax credits, such as the Clean Hydrogen Production Tax Credit and Clean Hydrogen Investment Tax Credit, demonstrated support for hydrogen development and production,” said Sean Moran, Tax partner, Vinson & Elkins. “These tax incentives provide the needed financial benefits based on carbon intensity, encouraging the production of clean hydrogen and promoting environmental sustainability. Additionally, the ability to monetize these tax credits through direct payment or transferability opens up new avenues for project financing and market participation to further drive innovation and contribute to a greener future.”
For more insights and to read the full report go to Power Play: Unlocking the Opportunity of Low-Carbon Hydrogen: Investment, Incentives, and Collaboration.
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